WMT remains health, wellness stalwart

It has been a challenging few years for Walmart among ongoing sales difficulties, restructuring of senior leadership and the pursuit of a new, yet familiar, strategic direction. Despite all the turmoil and the constant media attention it received, Walmart’s health-and-wellness business unit remained a steady performer through 2010.

The category of health and wellness — defined by Walmart to include the pharmacy and optical services — accounted for 11% of sales of $260 billion last year, versus 10% of roughly the same level of sales the prior year. There also was a modest increase in the number of pharmacies, which numbered 3,732 versus 3,694 the prior year.

So there was some growth; it just wasn’t the blistering pace set during the ’90s or earlier last decade when hundreds of new stores with pharmacies were opening annually and Walmart was gobbling market share. Rather, the past few years, it has been Walmart ceding market share to a wide range of competitors as evidenced by nearly two years of quarterly same-store sales declines. The company aims to reverse that trend by relying on familiar strategies of offering everyday low prices on the broadest assortment of goods in the marketplace, supported by a simplified price match program that allows cashiers to make on-the-sport adjustments.

The messaging is sure to sound familiar to customers since it served as the company’s core value proposition for decades. It is conceivable and perhaps even likely that with Walmart speaking to consumers again, it will see a rebound in customer traffic. Comp-store sales growth also is a realistic possibility, especially since comparisons with prior years are easing, and a bit of inflation, which all retailers appear to be passing through to consumers, will contribute to above-average transaction sizes.

These factors are poised to benefit the health-and-wellness business since an increase in customer traffic will be arising as merchandising changes are taking place under the leadership of new chief merchandising officer Duncan Mac Naughton. Walmart is placing a greater emphasis on new items and once again relying on in-aisle feature displays of sharply priced products to drive sales.

While a return of some familiar merchandising strategies is seen as helping top-line results, don’t look for a meaningful increase in the number of Walmart pharmacies anytime soon. The profits Walmart generates are increasingly being used to deliver shareholder value in ways other than new store growth. For example, share repurchases and dividends now consume significantly more cash than capital expenditures on new stores.

The biggest opportunity for Walmart to achieve a meaningful increase in its pharmacy count lies in the development and subsequent expansion of small-format stores, which are included in this year’s capital budget. The company plans to opens its first truly small-format stores this year in an experiment in which some units will contain prescription departments and others will not. When the first of these new Walmart Express stores opens this spring in Northwest Arkansas, just in time for the company’s shareholders meeting, they are sure to attract considerable interest due to their potential impact on the marketplace if Walmart is able to grow the concept.

That’s a big “if.” While no one doubts Walmart would be capable of opening huge numbers of small stores annually or that the potential exists to make a real-estate acquisition to facilitate more rapid expansion, the financial viability of any type of small format is hardly a given at this point — this despite the fact that Walmart has ample experience with small stores in international markets and presumably should be able to capitalize on that expertise with a U.S. variant.

The company has been down this path before with Neighborhood Market. Developed in the late ’90s, there are fewer than 200 of the stores today, and the reasoning for the slow pace of expansion was always that supercenters offer a higher rate of return. Now that it is 2011 and supercenter growth has slowed, there would appear to be a place in Walmart’s store portfolio for smaller units. However, a new competitor now exists for capital — in the international area. Of Walmart’s $12.7 billion in capital expenditures last year, the bulk of it was for new stores, and the U.S. and international division were each allocated 33% of that amount. However, internationally, Walmart gets more bang for its buck. Walmart added 23 million sq. ft. of new selling space internationally, whereas in the United States, a comparable expenditure netted only 10 million sq. ft. of new space. In addition, the company faces considerably less aggravation in many of its international markets as its proposition of low prices and quality merchandise for consumers and jobs with benefits is greeted more warmly.

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